A Signaling Perspective on Entrepreneurial Orientation: Too Much of a Good Thing?

Abstract

A high level of entrepreneurial orientation (EO) is ambivalent. While EO fosters firm performance, its consequences for firms’ risk are twofold: it may strengthen firms’ competitive position but likewise increase their risk of failure through explorative ventures. We take a novel signaling perspective on EO. In trading off risk and return, stock markets constantly evaluate signals. Signals enable firms to reduce the information asymmetry with markets while shaping markets’ perception of the firm. While EO might entail the chance for high returns, it comes along with higher risks. Consequently, we aim to advance the theory on signaling effects of EO in markets’ reactions to strategic announcements of newly public firms that are under increased scrutiny. We hypothesize that markets react most favorably at moderate levels of EO, constituting an inverse U-shaped relationship. We argue that firms’ industry position and business diversification moderate the relationship. Based on a sample of 1,393 firm-year observations of firms going public between 2001 and 2014, we find support for our hypotheses. By taking a signaling perspective on EO, we advance the literature on strategic orientations towards a new direction. From a practitioner’s perspective, firms and shareholders need to understand the signaling effects of EO.